<PAGE>
ANNUAL REPORT
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[logo]
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
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New England Balanced Fund
[Graphic Omitted]
DECEMBER 31, 1997
<PAGE>
February 1998
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"Even in 1997 . . . investors saw some sharp, short-term drops, whether they
were invested in the United States or overseas, in bonds or stocks."
[Photo]
Dear Shareholder:
In 1997, many investors once again had reason to be pleased with the performance
of their mutual fund holdings. However, in times such as these, expectations
tend to grow along with prices. It pays to remind ourselves that no trend is
permanent, and we should keep our goals realistic and long-term needs in focus.
In the third straight year of outstanding returns, the Dow Jones Industrial
Average and the Standard & Poor's 500 Stock Index -- two widely followed
indicators of the performance of large-company stocks -- gained 24.9% and 33.3%
respectively. At the same time, smaller-company stocks, as measured by the
Russell 2000 Index, were up 22.4%. Meanwhile, bond investors also were rewarded
as declining interest rates and rising prices meant solid gains. The Lehman Long
Treasury Index, for example, posted a 15.1% return for the year. Results were
less favorable for international investors, especially those exposed to emerging
markets or the financial turmoil in Asia.
Gratifying though it has been, the markets' surge of the past few years obscures
the historic norm: Downturns and volatility also are regular features of
investing. Even in 1997, notwithstanding the impressive overall results,
investors saw some sharp, short-term drops, whether they were invested in the
United States or overseas, in bonds or stocks. Market fluctuations remind us of
some valuable lessons.
First, volatility is inevitable, and should not disrupt long-term programs
without sufficient evaluation. Those who sold in response to downturns --
October 1987 is an obvious example -- may have missed out on the subsequent
uptrend. Second, sound diversification can reduce risk. A useful exercise is to
review your asset allocation regularly with your financial representative.
Starting in 1998, you have one more reason to consult with your representative:
Newly expanded retirement options, including the new Roth IRA, could play an
important role in your retirement and tax planning for years to come. With this
in mind, New England Funds has introduced programs specially designed to help
you make the most of the newest retirement vehicles.
[Dalbar Logo]
1995 o 1996 o 1997
In addition to offering quality mutual fund choices and tax-advantaged plans, we
focus on providing the highest quality customer service. This is why I am
pleased to report that we have received DALBAR's Mutual Fund Service Award for
"providing the highest tier of service excellence in the mutual fund industry."
New England Funds is one of just three mutual fund companies to receive this
award for the third consecutive year from DALBAR, an independent evaluator of
mutual fund service. We are continuing to work to provide even more effective
services. Two examples are: the Personal Access Line(TM) -- our enhanced
automated telephone account service (800-346-5984) -- and the account
information section of the New England Funds web site (www.mutualfunds.com).
Each provides convenient, 24-hour access to current information about your New
England Funds accounts.
All of us at New England Funds thank you for your continued support and look
forward to serving you in the years ahead.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer
President
<PAGE>
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NEW ENGLAND BALANCED FUND
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Investment Results Through December 31, 1997
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Putting Performance in Perspective
The charts comparing your Fund's performance to a benchmark index provide you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
[A chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in New England Balanced Fund Class A Shares since 12/31/87,
compared to a blend of the S&P 500 and Lehman Intermediate Government/Corporate
Indices. The data points to this chart are as follows:]
Growth of a $10,000 Investment in Class A Shares
December 1987 through December 1997
NAV MSC S&P 500
12/31/1987 $10,000 $ 9,425 $10,000
1988 $11,002 $10,369 $10,799
1989 $12,143 $11,445 $13,628
1990 $10,856 $10,232 $13,684
1991 $14,027 $13,220 $17,170
1992 $15,981 $15,062 $19,565
1993 $18,247 $17,198 $20,402
1994 $17,760 $16,738 $24,052
1995 $22,432 $21,142 $31,025
1996 $26,272 $24,762 $36,084
1997 $30,878 $29,102 $44,892
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B, Class C and Class Y
share performance will be greater or less than that shown based on differences
in inception date, fees and sales charges. All Index and Fund performance
assumes reinvested distributions.
NEW ENGLAND BALANCED FUND
AVERAGE ANNUAL TOTAL RETURNS -- 12/31/97
CLASS A (Inception 11/27/68) 1 YEAR 5 YEARS 10 YEARS
Net Asset Value(1) 17.53% 14.08% 11.94%
With Max. Sales Charge(2) 10.78 12.74 11.27
S&P/Lehman Intermediate G/C Blend(4) 24.41 15.48 14.62
Lipper Balanced Average(5) 18.96 13.20 12.92
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CLASS B (Inception 9/13/93) 1 YEAR 3 YEARS SINCE INCEPTION
Net Asset Value(1) 16.67% 19.34% 13.08%
With CDSC(3) 11.67 18.64 12.77
S&P/Lehman Intermediate G/C Blend(4) 24.41 23.35 16.21
(Lehman calculated from 9/30/93)
Lipper Balanced Average(5) 18.96 19.42 13.11
(calculated from 9/30/93)
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CLASS C (Inception 12/30/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 16.64% 19.28%
S&P/Lehman Intermediate G/C Blend(4) 24.41 23.35
Lipper Balanced Average(5) 18.96 19.42
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CLASS Y (Inception 3/8/94) 1 YEAR 3 YEARS SINCE INCEPTION
Net Asset Value(1) 18.11% 20.79% 15.13%
S&P/Lehman Intermediate G/C Blend(4) 24.41 23.35 18.21
(Lehman calculated from 3/31/94)
Lipper Balanced Average(5) 18.96 19.42 15.54
(calculated from 3/31/94)
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost. The Fund was changed from an equity income fund to a balanced
fund on March 1, 1990. Results for periods prior to that date reflect former
investment policies and are not necessarily representative of results that would
have been achieved had the Fund's current investment policies then been in
effect.
NOTES TO CHARTS
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 5.75% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
5% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero six years after the
purchase of shares.
(4) Represented by a 65% weighting in the S&P 500 and a 35% weighting in the
Lehman Intermediate Government/Corporate Bond Index. Indices are rebalanced
to 65%/35% at the end of each year. Lehman Intermediate Government/Corporate
Bond Index is an unmanaged index of investment grade bonds, issued by the
U.S. government and U.S. corporations, having maturities between one and ten
years. The indices' performance have not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable
to mutual fund investments.
(5) Lipper Balanced Average is an average of the total return performance
(calculated on the basis of net asset value) of funds with similar
investment objectives as calculated by Lipper Analytical Services, an
independent mutual fund ranking service.
<PAGE>
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NEW ENGLAND BALANCED FUND
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QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
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Q. Please tell us about New England Balanced Fund's 1997 performance.
[Photo of Carol McMurtrie]
[Photo of Tricia Mills]
[Photo of Meri Anne Beck]
[Photo of John Hyll]
[Photo of Roderick Dillon]
[Photo of Barr Segal]
Carol McMurtrie,
Tricia Mills,
Meri Anne Beck,
John Hyll,
Roderick Dillon,
Barr Segal,
Loomis, Sayles & Co., L.P.
For the year ending December 31, 1997, New England Balanced Fund's Class A
shares had a total return (based on net asset value) of 17.53%, compared to an
average return of 18.96% for the Lipper Balanced Fund average. Both the equity
and fixed-income portions of the portfolio contributed to the Fund's return,
which reflected a $0.31 per share gain in net asset value to $14.25 per share
and the reinvestment of $2.07 per share in income and capital gains
distributions.
The Fund's Class B and C shares had total returns (based on net asset value) of
16.67% and 16.64%, respectively.
Q. What was the investment environment like?
Early in 1997, investors concentrated on a few very large companies expected do
well despite the economic slowdown that many foresaw. This large-
capitalization bias fed sharp rises in the major market indicators -- the S&P
500 Index and the Dow Jones Industrial Average.
But instead of slowing, the economy kept expanding, shifting institutional focus
to large-capitalization cyclical companies that might benefit from an upturn. In
March, the Federal Reserve Board raised short-term interest rates a one-quarter
percentage point, the only increase in 1997.
Sustained economic vigor and low inflation encouraged investors to seek wider
opportunities. Consequently, in the second and third quarters, value stocks and
mid-sized companies, categories that the Fund emphasized, outperformed the
large-cap sector. Then, as the Asian economic crisis began to unsettle the
region's markets, capital once again poured into big highly liquid holdings with
defensive characteristics.
Q. Given this environment, what was your strategy during the year?
During the market's rise, the portfolio's equity exposure reached 67%. Bonds,
meanwhile, were weak (due to fears of inflation and higher interest rates),
keeping the fixed-income portion of the Fund below its usual 35%- 40% range.
When stocks began to look overvalued, we eased back our equity commitment to the
lower end of our 60%- to-65% target range. We ended 1997 slightly below that
range, having found more "sell" candidates than "buy" ideas in the waning weeks
of the year.
Your Fund's Asset Mix -- 12/31/97
Stocks 59.5%
Bonds 39.4%
Cash & Cash Equivalents 1.1%
Portfolio holdings and asset allocations will vary.
Q. What were some of the factors that affected equity performance, either
positively or negatively?
The Fund benefited from its emphasis on banks and its underweighting in
utilities. The economic background -- low inflation and declining interest rates
- -- favored earnings growth for banks. Meanwhile, the new, competitive operating
environment introduced uncertainty into earnings estimates for utilities and
held back their dividend growth. Elsewhere, the portfolio's telecommunications
holdings lagged until late in the fourth quarter, while stocks in the healthcare
services sector were disappointing. Our commitment to technology stocks, while
small, served the Fund well.
Because we emphasize value-based stock selection, the Fund was underexposed to
the large-cap growth stocks that the market favored. The Fund benefited from the
summer rally in mid-cap stocks, especially those with lower price/earnings
ratios that more closely fit our value-investing mission.
Q. What was the fixed-income environment like, and how did you respond?
After rising early in the year, interest rates declined as inflation concerns
dwindled, moving bond prices higher. By August, economic instability in
Southeast Asia led investors to the safer harbor of U.S. Treasury securities,
driving prices up and yields down further.
Your Fund's Five Largest Industries -- 12/31/97
% of
Industry Net Assets
------------------------------------------------
1. U.S. Government and Agencies 9.6
------------------------------------------------
2. Banks 7.8
------------------------------------------------
3. Insurance 7.2
------------------------------------------------
4. Telephone 5.8
------------------------------------------------
5. Chemicals 5.7
Portfolio holdings and asset allocations will vary.
Over the spring and summer, we extended the portfolio's duration -- a measure of
its overall sensitivity to interest rate changes -- to capture more of the price
rises we anticipated. We also increased holdings of U.S. agency mortgage
pass-throughs when that sector presented the opportunity to add yield at
attractive valuations.
Our commitment to corporate bonds paid off, as corporates outperformed other
bonds for most of the year. After the Fed raised short-term interest rates, we
invested in Sprint Spectrum and Loewen Group to take advantage of wider spreads
(the difference between the yields of corporate bonds and Treasury securities of
similar maturities). We also purchased bonds of Saga Petroleum and SKF. We
opportunistically eliminated our bond position in Columbia HCA and took profits
in Federated Department Stores.
As the year ended, the average quality of the bonds in the portfolio was AA,
with a few carefully selected high-yield bonds. There has been no exposure to
Southeast Asia; at year-end, all foreign holdings were Yankee bonds, which are
foreign issues that are insulated from currency fluctuations because they are
denominated in U.S. dollars.
Q. What do you see ahead for the bond and stock markets, and what does it imply
for the Fund?
Given our favorable outlook for bonds -- slower growth with low inflation -- we
continue to extend duration. Prolonged turmoil in Southeast Asia could limit
pricing power for U.S. companies, dampening inflation further -- another
positive for bond prices.
On the equity side, we will continue to focus on areas where Loomis Sayles'
analysts expect above-market growth rates. The Fund started 1998 with a
portfolio priced below the market's average price/earnings ratio while having an
overall better earnings growth outlook. We believe valuations generally favor
mid-cap stocks over large companies, particularly those mid-sized firms with
above-average growth prospects, an area in which the Fund is well positioned.
As in the past, we will rely on the extensive proprietary research capability of
Loomis Sayles, focusing on sound value in selecting stocks and bonds for the
portfolio.
<PAGE>
PORTFOLIO COMPOSITION
Investments as of December 31, 1997
COMMON STOCK--59.5% OF TOTAL NET ASSETS
SHARES DESCRIPTION VALUE (a)
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AEROSPACE--1.2%
42,000 Northrop Grumman Corp. ............................ $ 4,830,000
------------
APPAREL & TEXTILES--1.8%
79,200 Reebok International, Ltd. (c) .................... 2,281,950
157,400 Warnaco Group ..................................... 4,938,425
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7,220,375
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BANKS--6.5%
69,000 BankAmerica Corp. ................................. 5,037,000
84,900 Charter One Financial, Inc. ....................... 5,359,312
38,800 Chase Manhattan ................................... 4,248,600
33,800 Fleet Financial Group, Inc. ....................... 2,532,888
39,700 NationsBank Corp. ................................. 2,414,256
163,800 Norwest Corp. ..................................... 6,326,775
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25,918,831
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CHEMICALS--5.7%
225,400 Crompton & Knowles Corp. .......................... 5,973,100
79,400 El duPont de Nemours & Co. ........................ 4,768,962
150,200 IMC Global, Inc., Rights (c) ...................... 4,919,050
42,700 PPG Industries, Inc. .............................. 2,439,238
182,400 Solutia, Inc. (c) ................................. 4,867,800
------------
22,968,150
------------
COMPUTERS & BUSINESS EQUIPMENT--2.0%
91,000 3Com Corp. (c) .................................... 3,179,313
151,700 Gateway 2000, Inc. ................................ 4,949,212
------------
8,128,525
------------
CONSUMER-JEWELRY/NOVELTY/GIFTS--1.4%
140,900 American Greetings Corp. .......................... 5,512,713
------------
ELECTRIC COMPANIES--0.0%
2,500 CMS Energy Corp. .................................. 110,156
------------
ELECTRONICS--1.1%
88,700 Raytheon Co., Class B ............................. 4,479,350
------------
FINANCIAL SERVICES--3.0%
140,900 Federal Home Loan Mortgage Corp. .................. 5,908,994
106,600 Federal National Mortgage Association ............. 6,082,862
------------
11,991,856
------------
FREIGHT TRANSPORTATION--2.0%
171,700 Canadian Pacific, Ltd. ............................ 4,678,825
54,700 Federal Express Corp. (c) ......................... 3,340,119
------------
8,018,944
------------
HEALTH CARE--SERVICES--2.5%
35,200 Aetna, Inc. ....................................... 2,483,800
153,700 Columbia/HCA Healthcare Corp. ..................... 4,553,362
136,700 Foundation Health Systems, Inc. (c) ............... 3,058,663
------------
10,095,825
------------
HOUSING & BUILDING MATERIALS--4.5%
66,900 Armstrong World Industries, Inc. .................. 5,000,775
116,500 Leggett & Platt, Inc. ............................. 4,878,437
105,800 Masco Corp. ....................................... 5,382,575
44,600 Philips Electronics NV (ADR) (d) .................. 2,698,300
------------
17,960,087
------------
INSURANCE--6.6%
53,400 ACE, Ltd. ......................................... 5,153,100
51,600 Allstate Corp. .................................... 4,689,150
136,000 Everest Reinsurance Holdings, Inc. ................ 5,610,000
51,200 Loews Corp. ....................................... 5,433,600
165,900 TIG Holdings, Inc. ................................ 5,505,806
------------
26,391,656
------------
LEISURE TIME--1.5%
192,800 Hasbro, Inc. ...................................... 6,073,200
------------
MACHINERY--2.7%
43,500 Case Corp. ........................................ 2,629,031
47,200 Deere & Co. ....................................... 2,752,350
145,800 Dover Corp. ....................................... 5,267,025
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10,648,406
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MANUFACTURING--DIVERSIFIED--1.2%
122,000 Allied Signal, Inc. ............................... 4,750,375
------------
MANUFACTURING -- SPECIAL--0.4%
44,200 York International Corp. .......................... 1,748,663
------------
OIL & GAS--3.5%
31,000 British Petroleum PLC (ADR) (d) ................... 2,470,312
155,300 Tosco Corp. ....................................... 5,872,281
72,800 United Meridian Corp. (c) ......................... 2,047,500
89,100 Unocal Corp. ...................................... 3,458,194
------------
13,848,287
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PAPER & FOREST PRODUCTS--0.4%
14,700 Georgia Pacific Corp. ............................. 893,025
14,700 Georgia Pacific Timber Corp. ...................... 333,506
12,600 Mead Corp. ........................................ 352,800
------------
1,579,331
------------
RETAIL--2.7%
134,700 Dillard's, Inc. ................................... 4,748,175
252,000 Office Depot, Inc. ................................ 6,032,250
------------
10,780,425
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RETAIL--FOOD & DRUG--1.5%
159,700 Kroger Co. (c) .................................... 5,898,919
------------
TELEPHONE--5.8%
72,200 Ameritech Corp. ................................... 5,812,100
54,400 Bell Atlantic Corp. ............................... 4,950,400
110,700 BellSouth Corp. ................................... 6,233,794
84,300 SBC Communications, Inc. .......................... 6,174,975
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23,171,269
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TOBACCO--1.5%
163,400 UST, Inc. ......................................... 6,035,588
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Total Common Stock
(Identified Cost $179,748,214) ................... 238,160,931
------------
BONDS AND NOTES--39.4%
FACE
AMOUNT
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BANKS--1.3%
$1,140,000 Chase Manhattan Corp., 10.000%, 6/15/99 ........... 1,199,679
600,000 First National Tennessee Corp., 10.375%, 6/01/99 .. 634,788
3,430,000 Mellon Bank, 7.000%, 3/15/06 ...................... 3,538,560
------------
5,373,027
------------
CABLE & MEDIA--0.8%
3,270,000 TCI Communications, Inc., 7.250%, 6/15/99 ......... 3,307,507
------------
FINANCE--3.8%
2,000,000 American General Corp., 9.625%, 7/15/00 ........... 2,155,340
1,000,000 Avalon Properties, Inc., 7.375%, 9/15/02 .......... 1,035,930
1,790,000 Dean Witter Discover & Co., 6.750%, 1/01/16 ....... 1,772,333
1,000,000 General Motors Acceptance Corp., 5.500%, 12/15/01 . 971,640
1,700,000 Household International, 5.250%, 10/15/98 ......... 1,690,820
940,000 International Lease Finance Corp., 6.350%, 11/07/01 946,824
1,700,000 Sears, Roebuck Acceptance Corp., 6.950%, 5/15/02 .. 1,745,254
2,425,000 Secured Finance, 9.050%, 12/15/04 ................. 2,769,035
2,084,418 World Omni Automobile Lease Finance Corp., 6.550%,
6/25/02 ......................................... 2,094,153
------------
15,181,329
------------
FOOD & BEVERAGES--1.0%
3,700,000 Archer-Daniels-Midland Co., 7.500%, 3/15/27 ....... 4,053,350
------------
U.S. GOVERNMENT AND AGENCIES--9.6%
2,575,000 Federal Home Loan Bank, 4.281%, 11/23/98 (e) ...... 2,525,921
7,600,000 United States Treasury Bonds, 6.500%, 11/15/26 .... 8,113,000
3,520,000 United States Treasury Bonds, 6.625%, 2/15/27 ..... 3,821,382
500,000 United States Treasury Notes, 6.625%, 7/31/01 ..... 514,060
3,855,000 United States Treasury Notes, 6.500%, 8/15/05 ..... 4,022,461
8,150,000 United States Treasury Notes, 7.000%, 7/15/06 ..... 19,590,566
------------
38,587,390
------------
HEALTH CARE--SERVICES--0.5%
1,775,000 National Health Investors, Inc., 7.300%, 7/16/07 .. 1,855,408
------------
INDUSTRIALS--4.0%
3,390,000 Loewen Group International, Inc.,
7.750%, 10/15/01 ................................ 3,531,499
1,790,000 Philips Electronics NV, 7.250%, 8/15/13 ........... 1,837,721
4,765,000 SKF, 7.125%, 7/01/07 .............................. 4,980,521
2,000,000 Tektronix, Inc., 7.625%, 8/15/02 .................. 2,076,100
2,500,000 Textron, Inc., 6.625%, 11/15/07 ................... 2,532,525
1,200,000 Williams Holdings Co., 6.250%, 2/01/06 ............ 1,186,224
------------
16,144,590
------------
INSURANCE--0.6%
1,095,000 Progressive Corp., 10.000%, 12/15/00 .............. 1,202,310
1,000,000 USF&G Corp., 8.375%, 6/15/01 ...................... 1,057,550
------------
2,259,860
------------
LEISURE & LODGING--1.9%
2,125,000 Carnival Corp., 7.050%, 5/15/05 ................... 2,188,601
3,000,000 La Quinta Inns, Inc., 7.400%, 9/15/05 ............. 3,075,000
2,000,000 Royal Caribbean Cruises Line, 8.125%, 7/28/04 ..... 2,149,880
------------
7,413,481
------------
MEDIA & ENTERTAINMENT--0.5%
1,710,000 Time Warner Entertainment Co., 8.875%, 10/01/12 ... 2,005,693
------------
MORTGAGE--3.7%
6,180,000 Federal Home Loan Mortgage Corp.,
6.000%, 12/01/27 ................................ 5,957,891
2,130,380 Federal National Mortgage Association,
7.000%, 12/01/11 ................................ 2,164,551
1,573,693 Federal National Mortgage Association,
7.000%, 12/01/11 ................................ 1,598,935
1,986,713 Federal National Mortgage Association,
7.000%, 12/01/12 ................................ 2,015,878
215,578 Federal National Mortgage Association,
7.500%, 6/01/15 ................................. 223,716
3,000,000 Federal National Mortgage Association,
6.000%, 2/25/24 ................................. 2,807,250
------------
14,768,221
------------
MORTGAGE BACKED--1.2%
3,868,058 Federal Home Loan Mortgage Association,
6.000%, 8/15/22 ................................ 3,626,304
1,000,000 Federal Home Loan Mortgage Association,
6.500%, 3/15/23 ................................ 996,870
174,119 Federal Home Loan Mortgage Corp., 7.750%, 10/15/98 174,336
------------
4,797,510
------------
OIL & GAS--2.0%
4,190,000 Kerr-Mcgee Corp., 6.625%, 10/15/07 ................ 4,318,591
3,700,000 Saga Petroleum, 7.250%, 9/23/27 ................... 3,857,287
------------
8,175,878
------------
PAPER--0.3%
500,000 Westvaco Corp., 9.650%, 3/01/02 ................... 560,560
500,000 Westvaco Corp., 10.300%, 1/15/19 .................. 537,240
------------
1,097,800
------------
RAILROADS & EQUIPMENT--0.6%
2,350,000 Norfolk Southern Corp., 7.050%, 5/01/37 ........... 2,494,384
------------
RETAIL--0.1%
500,000 Sears, Roebuck & Co., 9.300%, 4/15/98 ............. 504,510
------------
SECURITIES--2.6%
3,050,000 Bear Stearns Cos., Inc., 6.750%, 12/15/07 ......... 3,062,810
1,500,000 Donaldson Lufkin & Jenrette, Inc.,
6.875%, 11/01/05 ................................ 1,525,275
1,500,000 Lehman Brothers Holdings, Inc., 8.875%, 11/01/98 .. 1,531,605
4,025,000 Salomon Inc., 7.000%, 3/15/04 ..................... 4,137,620
------------
10,257,310
------------
TECHNOLOGY--0.9%
3,410,000 Digital Equipment Corp., 8.625%, 11/01/12 ......... 3,735,075
------------
TELECOMMUNICATION--0.9%
4,600,000 Sprint Spectrum, L.P., Zero Coupon, 8/15/06 ....... 3,565,000
------------
TRANSPORTATION--2.0%
2,000,000 American Airlines, 10.180%, 1/02/13 ............... 2,499,540
1,000,000 Delta Air Lines, Inc., 7.790%, 12/01/98 ........... 1,013,930
500,000 Delta Air Lines, Inc., 9.530%, 11/17/99 ........... 527,800
600,000 Delta Air Lines, Inc., 9.200%, 9/23/14 ............ 711,660
3,000,000 Northwest Airlines Corp., 8.375%, 3/15/04 ......... 3,088,620
------------
7,841,550
------------
UTILITIES--0.6%
2,160,000 W3A Funding Corp., 8.090%, 1/02/17 ................ 2,257,934
------------
YANKEE/SUPRANATIONAL--0.5%
1,100,000 Export-Import Bank, Japan, 9.500%, 6/29/00 ........ 1,182,500
600,000 Hydro Quebec, 6.520%, 2/23/06 ..................... 605,886
------------
1,788,386
------------
Total Bonds and Notes (Identified
Cost $151,773,184) ............................ $157,465,193
------------
SHORT TERM INVESTMENTS--0.1%
- -------------------------------------------------------------------------------
536,000 Repurchase Agreement with State Street Bank & Trust
Co. dated 12/31/97 at 5.000% to be repurchased at
$536,149 on 1/02/98 collateralized by $540,000 U.S.
Treasury Note 6.000% due 9/30/98 with a value of
$549,539 ........................................ 536,000
------------
Total Short Term Investments (Identified Cost
$536,000) ....................................... 536,000
------------
Total Investments--99.0% (Identified
Cost $332,057,398) (b) ........................... 396,162,124
Other assets less liabilities ...................... 4,032,086
------------
Total Net Assets--100% ............................. $400,194,210
============
(a) See Note 1a.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on
investments based on cost of $332,401,265 for federal
income tax purposes was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost. ............................................ $ 72,165,435
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
value. .................................................... (8,404,576)
------------
Net unrealized appreciation ............................... $ 63,760,859
============
(c) Non-income producing security.
(d) An American Depository Receipt (ADR) is a certificate
issued by a U.S. bank representing the right to receive
securities of the foreign issuer described. The values of
ADRs are significantly influenced by trading on exchanges
not located in the United States or Canada.
(e) Floating rate notes are instruments whose interest rates
vary with changes in a designated base rate on a specific
date. These notes reset quarterly based upon a specific
index.
See accompanying notes to financial statements
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
December 31, 1997
ASSETS
Investments at value ..................... $396,162,124
Cash ..................................... 361
Receivable for:
Fund shares sold ....................... 470,880
Securities sold ........................ 1,788,757
Dividends and interest ................. 2,928,287
Prepaid registration expense ............. 9,000
------------
401,359,409
LIABILITIES
Payable for:
Securities purchased ................... $109,235
Fund shares redeemed ................... 604,269
Withholding taxes ...................... 5,069
Accrued expenses:
Management fees ........................ 252,999
Deferred trustees' fees ................ 75,044
Accounting and administrative .......... 5,336
Other .................................. 113,247
--------
1,165,199
------------
NET ASSETS ................................. $400,194,210
============
Net Assets consist of:
Capital paid in ........................ $331,203,062
Overdistributed net investment income .. (38,382)
Accumulated net realized gains ......... 4,924,759
Unrealized appreciation on investments . 64,104,771
------------
NET ASSETS ................................. $400,194,210
============
Computation of net asset value and offering price:
Net asset value and redemption price of
Class A shares ($233,420,724 divided by
16,376,185 shares of beneficial interest) $14.25
======
Offering price per share (100/94.25 of $14.2 $15.12*
======
Net asset value and offering price of Class
B shares ($76,557,592 divided by
5,410,555 shares of beneficial interest) . $14.15**
======
Net asset value and offering price of Class
C shares ($4,595,609 divided by 325,885
shares of beneficial interest) ........... $14.10
======
Net asset value and offering price of Class
Y shares ($85,620,285 divided by 6,000,914
shares of beneficial interest) ........... $14.27
======
Identified cost of investments ............. $332,057,398
============
* Based upon single purchases of less than $50,000.
Reduced sales charges apply for purchases in excess of this amount.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements
<PAGE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
INVESTMENT INCOME
Dividends .................................. $ 3,349,053(a)
Interest ................................... 10,445,137
------------
13,794,190
Expenses
Management fees .......................... $2,830,754
Service fees - Class A ................... 567,385
Service and distribution fees - Class B .. 680,895
Service and distribution fees - Class C .. 36,277
Trustees' fees and expenses .............. 21,000
Accounting and administrative ............ 63,882
Custodian ................................ 125,801
Transfer agent ........................... 670,248
Audit and tax services ................... 35,490
Legal .................................... 10,153
Printing ................................. 55,970
Registration ............................. 53,372
Miscellaneous ............................ 32,219
----------
Total expenses ............................. 5,183,446
------------
Net investment income ...................... 8,610,744
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Realized gain on Investments - net ......... 44,522,520
Unrealized appreciation on:
Investments - net ...................... 9,443,710
Foreign currency transactions - net .... 45
------------
Net unrealized appreciation on investments
and foreign currency transactions ........ 9,443,755
------------
Net gain on investment transactions ........ 53,966,275
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 62,577,019
============
(a) Net of foreign taxes of : $24,524.
See accompanying notes to financial statements
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income ................................... $ 8,916,803 $ 8,610,744
Net realized gain on investments ........................ 23,718,238 44,522,520
Unrealized appreciation on investments .................. 19,414,861 9,443,755
------------ ------------
Increase in net assets from operations .................. 52,049,902 62,577,019
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................................... (5,852,505) (5,058,699)
Class B ............................................... (1,086,841) (1,076,687)
Class C ............................................... (35,007) (59,400)
Class Y ............................................... (2,273,570) (2,402,391)
In excess of net investment income
Class A ............................................... (86,451) 0
Class B ............................................... (16,054) 0
Class C ............................................... (518) 0
Class Y ............................................... (33,584) 0
Net realized gain on investments
Class A ............................................... (14,194,062) (26,172,311)
Class B ............................................... (3,640,173) (8,351,315)
Class C ............................................... (144,376) (483,496)
Class Y ............................................... (4,878,053) (11,201,373)
------------ ------------
(32,241,194) (54,805,672)
------------ ------------
Increase in net assets derived from capital share
transactions .......................................... 41,383,400 34,227,005
------------ ------------
Total increase in net assets .......................... 61,192,108 41,998,352
NET ASSETS
Beginning of the year ................................... 297,003,750 358,195,858
------------ ------------
End of the year ......................................... $358,195,858 $400,194,210
============ ============
UNDISTRIBUTED/(OVERDISTRIBUTED) NET INVESTMENT INCOME
Beginning of the year ................................... $ 297,609 $ 67,903
============ ============
End of the year ......................................... $ 67,903 $ (38,382)
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .. $11.16 $12.13 $11.27 $13.14 $13.94
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ............... 0.31 0.33 0.42 0.38 0.33
Net Realized and Unrealized Gain
(Loss) on Investments ............. 1.26 (0.65) 2.49 1.76 2.05
------ ------ ------ ------ ------
Total From Investment Operations .... 1.57 (0.32) 2.91 2.14 2.38
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income (0.31) (0.33) (0.40) (0.39) (0.33)
Distributions From Net Realized
Capital Gains ..................... (0.29) (0.21) (0.64) (0.95) (1.74)
------ ------ ------ ------ ------
Total Distributions ................. (0.60) (0.54) (1.04) (1.34) (2.07)
------ ------ ------ ------ ------
Net Asset Value, End of Year ........ $12.13 $11.27 $13.14 $13.94 $14.25
====== ====== ====== ====== ======
Total Return (%) (a) ................ 14.2 (2.7) 26.3 17.1 17.5
Ratio of Operating Expenses to
Average Net Assets (%) ............ 1.40 1.40 1.36 1.33 1.29
Ratio of Net Investment Income to
Average Net Assets (%) ............ 2.66 2.91 3.37 2.79 2.25
Portfolio Turnover Rate (%) ......... 50 36 54 70 69
Average Commission Rate (b) ......... -- -- -- $0.0577 $0.0590
Net Assets, End of Year (000) ..... $158,308 $158,332 $196,514 $219,626 $233,421
(a) A sales charge is not reflected in total return calculations.
(b) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average
commission rate per share for trades upon which commissions are charged. This rate generally does not
reflect mark- ups, mark-downs, or spreads on shares traded on a principal basis.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- continued
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------
SEPTEMBER 13(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------------------------------
1993 1994 1995 1996 1997
---------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $12.16 $12.11 $11.24 $13.08 $13.86
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ............... 0.16 0.26 0.34 0.29 0.23
Net Realized and Unrealized Gain
(Loss) on Investments ............. 0.24 (0.66) 2.46 1.74 2.03
------ ------ ------ ------ ------
Total From Investment Operations .... 0.40 (0.40) 2.80 2.03 2.26
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income (0.16) (0.26) (0.32) (0.30) (0.23)
Distributions From Net Realized
Capital Gains ..................... (0.29) (0.21) (0.64) (0.95) (1.74)
------ ------ ------ ------ ------
Total Distributions ................. (0.45) (0.47) (0.96) (1.25) (1.97)
------ ------ ------ ------ ------
Net Asset Value, End of Period ...... $12.11 $11.24 $13.08 $13.86 $14.15
====== ====== ====== ====== ======
Total Return (%) (c) ................ 3.3 (3.4) 25.3 16.3 16.7
Ratio of Operating Expenses to
Average Net Assets (%) ............ 2.36 (b) 2.15 2.11 2.08 2.04
Ratio of Net Investment Income to
Average Net Assets (%) ............ 1.92 (b) 2.16 2.62 2.04 1.50
Portfolio Turnover Rate (%) ......... 50 36 54 70 69
Average Commission Rate (d) ......... -- -- -- $0.0577 $0.0590
Net Assets, End of Period (000) ..... $4,691 $21,607 $40,361 $58,367 $76,558
(a) Commencement of Operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge in the case of Class B shares is not reflected in total return
calculations. Periods less than one year are not annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average
commission rate per share for trades upon which commissions are charged. This rate generally does not
reflect mark- ups, mark-downs, or spreads on shares traded on a principal basis.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- continued
<TABLE>
<CAPTION>
CLASS C
--------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Year ....................... $11.24 $13.05 $13.82
------ ------ ------
Income From Investment Operations
Net Investment Income .................................... 0.35 0.29 0.23
Net Realized and Unrealized Gain on Investments .......... 2.44 1.73 2.02
------ ------ ------
Total From Investment Operations ......................... 2.79 2.02 2.25
------ ------ ------
Less Distributions
Dividends From Net Investment Income ..................... (0.34) (0.30) (0.23)
Distributions From Net Realized Capital Gains ............ (0.64) (0.95) (1.74)
------ ------ ------
Total Distributions ...................................... (0.98) (1.25) (1.97)
------ ------ ------
Net Asset Value, End of Year ............................. $13.05 $13.82 $14.10
====== ====== ======
Total Return (%) ......................................... 25.2 16.2 16.6
Ratio of Operating Expenses to Average Net Assets (%) .... 2.11 2.08 2.04
Ratio of Net Investment Income to Average Net Assets (%) . 2.62 2.04 1.50
Portfolio Turnover Rate (%) .............................. 54 70 69
Average Commission Rate (a) .............................. -- $0.0577 $0.0590
Net Assets, End of Year (000) ............................ $718 $2,538 $4,596
(a) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its
average commission rate per share for trades upon which commissions are charged. This rate
generally does not reflect mark- ups, mark-downs, or spreads on shares traded on a principal
basis.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- continued
<TABLE>
<CAPTION>
CLASS Y
--------------------------------------------------------
MARCH 8(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------
1994 1995 1996 1997
----------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $12.20 $11.27 $13.15 $13.95
------ ------ ------ ------
Income From Investment Operations
Net Investment Income ............... 0.38 0.46 0.44 0.40
Net Realized and Unrealized Gain
(Loss) on Investments ............. (0.72) 2.51 1.76 2.06
------ ------ ------ ------
Total From Investment Operations .... (0.34) 2.97 2.20 2.46
------ ------ ------ ------
Less Distributions Dividends From Net
Investment Income . (0.38) (0.45) (0.45) (0.40)
Distributions From
Net Realized Capital Gains ........ (0.21) (0.64) (0.95) (1.74)
------ ------ ------ ------
Total Distributions ................. (0.59) (1.09) (1.40) (2.14)
------ ------ ------ ------
Net Asset Value, End of Period ...... $11.27 $13.15 $13.95 $14.27
====== ====== ====== ======
Total Return (%) (c) ................ (2.8) 26.8 17.6 18.1
Ratio of Operating Expenses to
Average Net Assets (%) ............ 0.99(b) 1.11 0.88 0.88
Ratio of Net Investment Income
to Average Net Assets (%) ......... 3.69(b) 3.62 3.24 2.66
Portfolio Turnover Rate (%) ......... 36 54 70 69
Average Commission Rate (d) ......... -- -- $0.0577 $0.0590
Net Assets, End of Period (000) ..... $39,183 $59,411 $77,665 $85,620
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its
average commission rate per share for trades upon which commissions are charged. This rate
generally does not reflect mark- ups, mark-downs, or spreads on shares traded on a principal
basis.
</TABLE>
See accompanying notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. The Fund is a Series of New England Funds Trust I, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Declaration of Trust permits the trustees to issue an unlimited
number of shares of the Trust in multiple series (each such series of shares a
"Fund").
The Fund offers Class A, Class B, Class C and Class Y shares. The Fund
commenced its public offering of Class B shares on September 13, 1993, of
Class C shares on December 30, 1994 and of its Class Y shares on March 8,
1994. Class A shares are sold with a maximum front end sales charge of 5.75%.
Class B shares do not pay a front end sales charge, but pay a higher ongoing
distribution fee than Class A shares for eight years (at which point they
automatically convert to Class A shares), and are subject to a contingent
deferred sales charge if those shares are redeemed within six years of
purchase (or five years if purchased prior to May 1, 1997). Class C shares do
not pay a front end or contingent deferred sales charge and do not convert to
any other class of shares, but they do pay a higher ongoing distribution fee
than Class A shares. Class Y shares do not pay a front end sales charge, a
contingent deferred sales charge or distribution fees. They are intended for
institutional investors with a minimum of $1,000,000 to invest. Expenses of
the Fund are borne pro rata by the holders of each class of shares, except
that each class bears expenses unique to that class (including the Rule 12b-1
service and distribution fees applicable to such class), and votes as a class
only with respect to its own Rule 12b-1 plan. Shares of each class would
receive their pro-rata share of the net assets of the Fund, if the Fund were
liquidated. In addition, the trustees approve separate dividends on each class
of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. Equity securities are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of
Trustees, which service provides the last reported sale price for securities
listed on an applicable securities exchange or on the NASDAQ national market
system, or, if no sale was reported and in the case of over-the-counter
securities not so listed, the last reported bid price. Debt securities (other
than short-term obligations with a remaining maturity of less than sixty days)
are valued on the basis of valuations furnished by a pricing service, selected
by the Fund's adviser as authorized by the Board of Trustees, which service
determines valuations for normal, institutional-size trading units of such
securities using market information, transactions for comparable securities
and various relationships between securities which are generally recognized by
institutional traders. Short-term obligations with a remaining maturity of
less than sixty days are stated at amortized cost, which approximates value.
All other securities and assets are valued at their fair value as determined
in good faith by the Fund's advisor, New England Funds Management L.P., and
the subadvisor, under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income for the Fund is increased by
the accretion of discount. In determining net gain or loss on securities sold,
the cost of securities has been determined on the identified cost basis.
C. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains, at least annually. Accordingly, no provision for federal income tax has
been made.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The timing and characterization of
certain income and capital gains distributions are determined in accordance
with federal tax regulations which may differ from generally accepted
accounting principles. Permanent book and tax differences are primarily due to
differing treatments for mortgage backed securities, real estate limited
partnership investments and market discount transactions.
E. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price. The Fund's subadviser is responsible for
determining that the value of the collateral is at all times at least equal to
the repurchase price. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for
the Fund for the year ended December 31, 1997 were as follows:
PURCHASES SALES
- ----------------------------------------- -------------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
- --------------------- ------------------ ------------------ -----------------
$73,038,774 $188,114,259 $68,451,103 $203,320,091
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management L.P.
("NEFM") at the annual rate of 0.75% of the first $200 million of the Fund's
average daily net assets, 0.70% of the next $300 million and 0.65% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Loomis Sayles & Company, L.P. at the rate of 0.535% of the first $200 million
of the Fund's average daily net assets, 0.350% of the next $300 million and
0.300% of such assets in excess of $500 million. Certain officers and
directors of NEFM are also officers or trustees of the Fund. NEFM and Loomis
Sayles & Company, L.P. are wholly owned subsidiaries of New England Investment
Companies, L.P., ("NEIC") which is a subsidiary of Metropolitan Life Insurance
Company ("Met Life"). Fees earned by NEFM and Loomis Sayles & Company, L.P.
under the management agreement in effect during the year ended December
31,1997 are as follows:
FEES EARNED
- -----------
$1,095,379 New England Funds Management, L.P.
$1,735,375 Loomis, Sayles & Company, L.P.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New
England Funds"), the Fund's distributor, is a wholly owned subsidiary of NEIC
and performs certain accounting and administrative services for the Fund. The
Fund reimburses New England Funds for all or part of New England Funds'
expenses of providing these services which include the following: (i) expenses
for personnel performing bookkeeping, accounting and financial reporting
functions and clerical functions relating to the Fund and (ii) expenses for
services required in connection with the preparation of registration
statements and prospectuses, registration of shares in various states,
shareholder reports and notices, proxy solicitation material furnished to
shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance. For the year ended December 31, 1997 these
expenses amounted to $63,882 and are shown separately in the financial
statements as accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent for the Fund. For the year ended December 31, 1997, the Fund
paid New England Funds $471,165 as compensation for its services in that
capacity. For the year ended December 31, 1997, the Fund received $7,694 in
transfer agent credits. The transfer agent expense in the Statement of
Operations is net of these credits.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted a Service Plan relating to the Fund's Class A Shares
(the "Class A Plan") and Service and Distribution Plans relating to the Fund's
Class B and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee
at the annual rate of up to 0.25% of the average daily net assets attributable
to the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by the New England Funds in providing personal services to investors
in Class A shares and/or the maintenance of shareholder accounts. For the year
ended December 31, 1997, the Fund paid New England Funds $567,385 in fees
under the Class A Plan. If the expenses of New England Funds that are
otherwise reimbursable under the Class A Plan incurred in any year exceed the
amounts payable by the Fund under the Class A Plan, the unreimbursed amount
(together with unreimbursed amounts from prior years) may be carried forward
for reimbursement in future years in which the Class A Plan remains in effect.
The amount of unreimbursed expenses carried forward at December 31, 1997 is
$2,041,399.
Under the Class B and Class C Plans, the Fund pays New England Funds monthly
service fees at the annual rate of up to 0.25% of the average daily net assets
attributable to the Fund's Class B and Class C shares, as compensation for
services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in providing personal services to investors in Class B and Class C
shares and/or the maintenance of shareholder accounts. For the year ended
December 31, 1997, the Fund paid New England Funds $170,224 and $9,069 in
service fees under the Class B and Class C plans, respectively.
Also under the Class B and Class C Plan, the Fund pays New England Funds a
monthly distribution fee at the annual rate of up to 0.75% of the average
daily net assets attributable to the Fund's Class B and Class C shares, as
compensation for services provided and expenses (including certain payments to
securities dealers, who may be affiliated with New England Funds) incurred by
New England Funds in connection with the marketing or sale of Class B and
Class C shares. For the year ended December 31, 1997, the Fund paid New
England Funds $510,671 and $27,208 in distribution fees under the Class B and
Class C plans, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors in shares of the Fund during the year ended
December 31, 1997 amounted to $587,732.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation
directly to its officers or trustees who are directors, officers or employees
of NEFM, New England Funds, NEIC or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as
follows:
Annual Retainer $2,057
Meeting Fee $109/meeting
Committee Meeting Fee $65/meeting
Committee Chairman Retainer $151/year
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have been, had it been invested in the
Fund on the normal payment date.
4. CAPITAL SHARES. At December 31, 1997 there was an unlimited number of
shares of beneficial interest authorized, divided into four classes, Class A,
Class B, Class C and Class Y capital stock. Transactions in capital shares
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------------------- ---------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold .......................... 2,042,042 $27,474,652 2,817,913 $40,996,836
Shares issued in connection with the
reinvestment of:
Dividends from net investment income 422,784 5,671,048 334,010 4,805,523
Distributions from net realized gain 1,028,876 13,651,501 1,767,242 25,250,301
---------- ----------- ---------- -----------
3,493,702 46,797,201 4,919,165 71,052,660
Shares repurchased ................... (2,688,513) (36,228,573) (4,301,205) (62,553,540)
---------- ----------- ---------- -----------
Net increase ........................ 805,189 $10,568,628 617,960 $ 8,499,120
---------- ----------- ---------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------------------- ---------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold .......................... 1,210,684 $16,217,164 1,277,539 $18,483,400
Shares issued in connection with the
reinvestment of:
Dividends from net investment income 78,261 1,044,705 71,225 1,016,924
Distributions from net realized gain 265,769 3,505,614 566,453 8,034,641
---------- ----------- ---------- -----------
1,554,714 20,767,483 1,915,217 27,534,965
Shares repurchased ................... (428,641) (5,756,244) (716,112) (10,405,386)
---------- ----------- ---------- -----------
Net increase ........................ 1,126,073 $15,011,239 1,199,105 $17,129,579
---------- ----------- ---------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------------------- ---------------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
- ------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold .......................... 139,602 $ 1,870,733 155,255 $ 2,254,801
Shares issued in connection with the
reinvestment of:
Dividends from net investment income 2,512 33,499 3,834 54,473
Distributions from net realized gain 10,413 137,144 32,135 454,275
---------- ----------- ---------- -----------
152,527 2,041,376 191,224 2,763,549
Shares repurchased ................... (23,905) (318,332) (48,951) (713,283)
---------- ----------- ---------- -----------
Net increase ........................ 128,622 $ 1,723,044 142,273 $ 2,050,266
---------- ----------- ---------- -----------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------------------- ---------------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- ------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold .......................... 1,301,205 $17,576,774 2,379,842 $35,365,862
Shares issued in connection with the
reinvestment of:
Dividends from net investment income 171,746 2,306,879 166,670 2,402,299
Distributions from net realized gain 366,945 4,878,050 782,566 11,201,375
---------- ----------- ---------- -----------
1,839,896 24,761,703 3,329,078 48,969,536
Shares repurchased ................... (789,611) (10,681,214) (2,895,751) (42,421,496)
---------- ----------- ---------- -----------
Net increase ........................ 1,050,285 $14,080,489 433,327 $ 6,548,040
---------- ----------- ---------- -----------
Increase derived from capital shares
transactions ....................... 3,110,169 $41,383,400 2,392,665 $34,227,005
========== =========== ========== ===========
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of New England Funds Trust I and Shareholders of
NEW ENGLAND BALANCED FUND.
In our opinion, the accompanying statement of assets & liabilities, including
the portfolio composition, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of New England Balanced Fund ("the
Fund"), a series of New England Funds Trust I, at December 31, 1997 and the
results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and the financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities owned at December 31,
1997 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 12, 1998
<PAGE>
NEW ENGLAND FUNDS
Supplement dated March 1, 1998 to the New England Stock Funds Prospectus for
Class A, B and C shares dated May 1, 1997 (as supplemented August 1, 1997,
November 17, 1997 and January 1, 1998); the New England Star Funds Prospectus
for Class A, B and C shares dated May 1, 1997 (as supplemented June 30, 1997,
July 28, 1997, November 17, 1997 and January 1, 1998); and the New England
Equity Income Fund Prospectus for Class A, B and C shares dated September 1,
1997 (as supplemented November 17, 1997 and January 1, 1998).
THIS SUPPLEMENT APPLIES TO ALL FUNDS OFFERING CLASS C SHARES:
The cover page of each Prospectus is revised to reflect:
o While no initial sales charge applies to Class B or Class C share purchases,
a contingent deferred sales charge (a "CDSC") is imposed upon certain
redemptions of Class B and Class C shares.
o New England Funds Trust I, New England Funds Trust II and New England Funds
Trust III are referred to in the Prospectus as the "Trusts."
THE SHAREHOLDER TRANSACTION EXPENSES CHART FOR CLASS C SHARES APPEARING IN THE
"SCHEDULE OF FEES" SECTION IS REVISED WITH RESPECT TO CLASS C SHARES TO READ
AS FOLLOWS:
CLASS C
------------
Maximum Initial Sales Charge Imposed on a Purchase (as a
percentage of offering price)(2) ............................ None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as
applicable)(2) .............................................. 1.00%
(2) Does not apply to reinvested distributions.
In the tables that appear under "Example" in the "Schedule of Fees" section,
the expense amounts in the Prospectus for Class C shares for the 1 Year period
assume no redemption. If shares are redeemed at period end, expense amounts
for each Fund would be as follows: New England Capital Growth Fund, $33; New
England Balanced Fund, $31; New England International Equity Fund, $35; New
England Value Fund, $31; New England Growth Opportunities Fund, $31; New
England Star Advisers Fund, $35; New England Star Worldwide Fund, $44; New
England Star Small Cap Fund, $38; New England Equity Income Fund, $33.
THE SECTION ENTITLED "BUYING FUND SHARES--SALES CHARGES--CLASS C SHARES" IS
REVISED TO READ AS FOLLOWS:
Class C shares are offered at net asset value, without an initial sales
charge, are subject to a 0.25% annual service fee and a 0.75% annual
distribution fee, are subject to a CDSC of 1.00% on redemptions made within
one year from the date of purchase and do not convert into another class.
The Distributor pays to investment dealers at the time of sale a sales
commission of 1.00% of the sales price of Class C shares sold by such
investment dealer. The Distributor will retain the service and distribution
fees assessed against Class C shares in the first year of investment, and the
entire amount of the CDSC paid by Class C shareholders upon redemption in the
first year, in order to compensate the Distributor for providing distribution-
related services to the Fund in connection with the sale of Class C shares,
and to reimburse the Distributor, in whole or in part, for the commissions
paid (and related financing costs) to investment dealers at the time of a sale
of Class C shares. Unlike Class B shares, there are no conversion features
associated with Class C shares; therefore, if Class C shares are held for more
than eight years Class C shareholders will thereafter be subject to higher
distribution fees than shareholders of other classes.
The holding period for determining the CDSC will continue to run after an
exchange to Class C shares of another series of the Trusts. If an exchange is
made to Class C shares of a Money Market Fund, then the one-year holding
period for purposes of determining the expiration of the CDSC will stop and
resumes only when an exchange is made back into Class C shares of a series of
the Trusts. If the Money Market Fund shares are redeemed rather than exchanged
back into a series of the Trusts, then the CDSC applies to the redemption. For
purposes of the CDSC, it is assumed that the shares held longest are the first
to be redeemed.
The CDSC on Class C shares is not imposed on shares purchased prior to March
1, 1998.
The CDSC will be assessed on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption.
Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares of the
same Fund purchased with reinvested dividends or capital gain distributions.
The first year of purchase ends one year after the day on which the purchase
was accepted.
The CDSC is deducted from the proceeds of the redemption, not the amount
remaining in the account, unless otherwise requested. The CDSC may be
eliminated for certain persons and organizations. See "Sales Charges--General"
below.
THE SECTION ENTITLED "OWNING FUND SHARES--EXCHANGING AMONG NEW ENGLAND FUNDS--
CLASS C SHARES" IS REVISED TO READ AS FOLLOWS:
You may exchange Class C shares of any series of the Trusts for Class C shares
of any other series of the Trusts which offers Class C shares or for Class C
shares of New England Cash Management Trust - Money Market Series. Such
exchanges will be made at the next-determined net asset value of the shares.
IN THE SECTION ENTITLED "FUND DETAILS--PERFORMANCE CRITERIA," THE THIRD
SENTENCE IN THE FIRST PARAGRAPH IS REVISED TO READ AS FOLLOWS:
Total return is measured by comparing the value of a hypothetical $1,000
investment in a class at the beginning of the relevant period to the value of
the investment at the end of the period (assuming deduction of the current
maximum sales charge on Class A shares, automatic reinvestment of all
dividends and capital gains distributions and, in the case of Class B and C
shares, imposition of the CDSC relevant to the period quoted).
<PAGE>
GLOSSARY FOR MUTUAL FUND INVESTORS
- -------------------------------------------------------------------------------
TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.
INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.
CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.
PRICE/EARNINGS RATIO - Current market price of a stock divided by its earnings
per share. Also known as the "multiple," the price/earnings ratio gives
investors an idea of how much they are paying for a company's earning power and
is a useful tool for evaluating the costs of different issues.
GROWTH INVESTING - An investment style that emphasizes companies with strong
earnings growth. Growth investing is generally considered more aggressive than
"value" investing.
VALUE INVESTING - A relatively conservative investment approach that focuses on
companies that may be temporarily out of favor or whose earnings or assets
aren't fully reflected in their stock prices. Value stocks will tend to have a
lower price/earnings ratio than that of growth stocks.
STANDARD & POOR'S 500 - Market value-weighted index showing the change in
aggregate market value of 500 stocks relative to the base period of 1941-1943.
It is composed mostly of companies listed on the New York Stock Exchange.
<PAGE>
- --------------------------------------------------------------------------------
SAVING FOR RETIREMENT
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
With today's lengthening life spans, you may be retired for 20 years or more
after you complete your working career. Living these retirement years the way
you've dreamed of will require considerable financial resources. while it's
never too late to start a retirement savings program, it's certainly never too
early: The sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at age
30, saves for just 10 years, then leaves the investment to grow. The second
investor starts 10 years later but saves much longer -- for 25 years, in fact.
Can you guess which investor accumulates the greater retirement nest egg? For
the answer, look at the chart.
- --------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, comparing the growth of
investments made for 10 years by an investor who begins investing at age 30 to
the growth of investments made for twenty-five years by an investor who begins
investing at age 40. A hypothetical appreciation of 10% is assumed. The data
points from the graph are as follows:]
Investor A - Begins investing at age 30 for 10 years:
Age Growth of Investments
30 $2,000
35 $15,431
40 $35,062
45 $90,943
55 $146,464
60 $235,882
65 $379,890
Investor B - Begins investing at age 40 for 25 years:
Age Growth of Investments
40 $2,000
45 $15,431
50 $37,062
55 $71,899
60 $128,005
65 $216,364
Assumes 10% hypothetical appreciation. For illustrative purposes only and not
indicative of future performance of any New England Fund.
Investor A invested $20,000, less than half of Investor B's commitment -- and
for less than half the time. Yet Investor A wound up with a much greater
retirement nest egg. The reason? It's all thanks to an early start.
New England Funds has prepared a number of informative retirement planning
guides. Call your financial representative or New England Funds today, and ask
for the guide that best fits your personal needs.
<PAGE>
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------
STOCK FUNDS
Star Small Cap Fund
Growth Fund
Star Advisers Fund
Capital Growth Fund
Growth Opportunities Fund
Value Fund
Equity Income Fund
Balanced Fund
INTERNATIONAL STOCK FUNDS
International Equity Fund
Star Worldwide Fund
BOND FUNDS
High Income Fund
Strategic Income Fund
Bond Income Fund
Government Securities Fund
Limited Term U.S. Government Fund
Adjustable Rate U.S. Government Fund
TAX EXEMPT FUNDS
Municipal Income Fund
Massachusetts Tax Free Income Fund
Intermediate Term Tax Free Fund of California
Intermediate Term Tax Free Fund of New York
MONEY MARKET FUNDS
Cash Management Trust, Money Market Series
Tax Exempt Money Market Trust
To learn more, and for a free prospectus,
contact your financial representative.
Visit our World Wide Web site at www.mutualfunds.com
New England Funds, L.P., Distributor
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
This material is authorized for distribution to prospective investors when it is
preceded or accompanied by the Fund's current prospectus, which contains
information about distribution charges, management and other items of interest.
Investors are advised to read the prospectus carefully before investing.
<PAGE>
--------------
(Logo) BULK RATE
NEW ENGLAND FUNDS(R) U.S. POSTAGE
Where The Best Minds Meet(R) PAID
BROCKTON, MA
PERMIT NO. 770
--------------
---------------------
399 Boylston Street
Boston, Massachusetts
02116
---------------------
- ---------------------
[Logo]
MUTUAL FUND
SERVICES AWARD
- ---------------------
DALBAR
HONORS COMMITMENT TO:
INVESTORS
- ---------------------
1995 o 1996 o 1997
BL56-0198
[recycle symbol] Printed On Recycled Paper
